Casino earnings up but 'disappointing'

Comparisons with post 9-11 slump confuse numbers, analysts note

December 11, 2002 - Cash flow at Las Vegas' top publicly traded casino companies continued rebounding in the third quarter although most of the improvements were the result of heavy cost-cutting and easy comparisons to the post-Sept. 11 tourism slump.

Most companies posted double-digit cash flow improvements except for Mandalay Resort Group whose earnings before interest, depreciation, taxes and amortization increased 7 percent compared with the third-quarter 2001.

"In general, we were somewhat disappointed by third-quarter earnings. Six companies missed expectations: Park Place, Ameristar, Boyd, Aztar, Argosy and Mandalay," Deutsche Bank Securities analyst Marc Falcone said. "We also had some companies like MGM (Mirage) with issues involving the quality of their earnings. Overall, earnings expectations exceeded reality and that, in turn, put downward pressure on stocks."

Brian Gordon, spokesman for Applied Analysis, a Las Vegas-based financial consulting company, said: "Two factors were in operation (to produce the third-quarter results): cost reductions and the third quarter last year had 20 days that were horrible right after Sept. 11.

"(Some gaming companies) are hitting Wall Street estimates, but without adjustments to their financials and some extraordinary developments, there are questions about where the numbers are actually falling," he said.

Joe Greff, a gaming analyst with Fulcrum Global Partners, an independent Wall Street investment firm, said: "Cash flow was up, but the numbers a year ago were decimated by Sept. 11. Fourth-quarter projections show cash flow should be ahead of last year, but behind fourth-quarter 2000, which was a more normalized level.

"Also," he added, "November is proving better than October, and our sense is that New Year's Eve is shaping up to be OK, nothing like 2000 levels, but well above 2001 levels."

The biggest uncertainty about fourth-quarter projections concerns Christmas and New Year's both falling on Wednesdays, Greff said, which could lead consumers to treat the holidays as if they were three long weekends or deter interest altogether.

Also, that operators are saying New Year's will be the strongest day for this holiday season means the biggest increase in revenue generation would fall in the first quarter of 2003 rather than in 2002, Greff said.

"For 2003, convention attendance is shaping up to be ahead of 2002, so we are optimistic in that regard. And also, international players continue to improve as a market segment," he said.

At Applied Analysis, Gordon said the first half of 2003 remains tentative.

"We expect to see an upswing in the second half of 2003, with all the usual caveats that a war in the Middle East could throw it all off track," he said. "In general, people are hesitant about travel on a leisure basis. Individuals want to wait and see where the threat of war falls out and where the dust will settle. Then people may resume their routine of taking vacations."

At Deutsche Bank, Falcone said it is important that gaming industry earnings were up 30 percent compared with '01 and up 12 1/2 percent compared with '00.

"Gaming is still a growth industry. It's hard to see many industries with that kind of growth," he said. "We are comfortable but cautious about the 2002 fourth quarter and 2003."

Deutsche Bank is projecting 3 percent to 5 percent "top line" revenue growth in 2003 combined with continued lower costs, better marketing programs and improved technology, he said.

Fulcrum is projecting revenue growth rates in 2003 of 5 percent to 9 percent generally, except for Park Place, which it projects will decline slightly, and cash flow increases of 1 percent to 15 percent except for Station Casinos, which it expects to show an increase of 32 percent.

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Article Copyright ©: R. Smith, Las Vegas Review-Journal